Glossary
EBITDAO
Earnings before interest, tax, depreciation, amortisation and the owner's remuneration. Useful, and easy to read as more than it is.
In plain English
EBITDAO takes EBITDA and adds back what the owner paid themselves. It is used in practice and professional services work, where the owner also does the work, and it answers a specific question: what did the business earn before it paid the person who runs it?
That is not the same question as what a buyer or a lender will earn from it. Whoever owns it next still has to get the work done, either by doing it themselves or by paying someone. Adding back the owner's pay without putting the cost of the role back in leaves an earnings figure nobody can actually collect.
Why a lender cares
This is where the two conventions diverge and it matters more than the acronym suggests. A credit team does not stop at adding the owner's drawings back; it replaces them with what the role would cost to hire, which is the owner's market salary adjustment. Where an owner has been underpaying themselves, EBITDAO flatters the business and the adjusted figure is materially lower. Where an owner has been taking more than the role is worth, it works the other way and the adjustment is in your favour. Either way, the number a lender adopts is the one after the role is properly costed.
Worked example
A practice reports $150,000 of profit after paying its owner $90,000. EBITDAO is $240,000. If the role would cost $160,000 to fill at market, the earnings a lender adopts are closer to $80,000, and a price built on the first number will not fund.
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